Market Performance

Global share markets rose in the September quarter, shrugging off Brexit concerns and the strengthening language from the US Federal Reserve regarding an increase in US official interest rates. The MSCI USD Accumulation index, a measure of global equity markets, rose +4.87% over the quarter, above the US S&P500 (+3.31%) and Dow Jones Industrial indices (+2.11%) but below Australia’s share market as measured by the S&P/ASX 200 Accumulation index (+5.14%). Domestically, sector level gains were driven by materials (+14.2%), consumer staples (+12.5%) and information technology (+9.3%), while laggards included telecommunications (-6.6%), utilities (-2.4%) and A-REITs (-1.9%). Mid caps (ex ASX50 to ASX200) continued to outperform the broader market (+5.14%) with the mid cap index up +7.55% over the September quarter.

In bond markets, the yield on US five year treasury bonds rose from 1.0% to 1.15% with the US economy showing signs of momentum and investor expectations strengthening that the next official interest rate increase from the Federal Reserve isn’t far away. The Fed ultimately decided against a September rate increase with Fed Chair Janet Yellen stating “the committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives”. In Australia the yield curve shifted lower in response to the RBA’s August cash rate cut. Despite the narrowing interest rate differential with US bond markets, over the quarter the Australian dollar gained $0.02 to AUD/USD $0.77 on the back of stronger prices for major export commodities.

Coal prices posted large gains in the September quarter with thermal coal gaining +42.4% and spot coking coal prices up +131.5%. Iron ore finished September at $55.9 per tonne, up +0.4% on 30 June prices. Base metals were also stronger with the LME base metals index up +4.4% led by double digit rises in nickel (+11.1%), zinc (+13.1%) and lead (+18.3%) spot prices. Spot gold (-0.5%) and oil prices (-0.7%) edged lower.

Data suggests the US economy continues to improve with the large consumer component of the US economy supported in recent times by continued employment gains, some improvement in average earnings, higher household wealth and low interest rates. In September the US Census Bureau announced real median household income increased by 5.2% between 2014 and 2015 while the official poverty rate decreased 1.2 percentage points. The confidence board consumer confidence index rose to 104.1 in August, a new post GFC cycle high with the percentage of respondents describing jobs as “hard to get” the best reading since August 2007. This broadly matches up with other measures of employment conditions. The unemployment rate has held at 4.9%, close to where it’s been for a year now. The various measures of wage inflation remain subdued, albeit some recent indicators suggest some moderate pickup.

In China, data on the industrial side of the economy has continued to moderate albeit is showing signs of stabilisation at a lower growth rate. The Caixin manufacturing PMI, which is skewed to SMEs and private companies, slipped to 50.0 in August with a reading below (above) 50 indicating contraction (expansion). Fixed asset investment is currently running at +8.1% year to date year on year (YTD YoY) down from 9.6% in May and 10% in 2015. While the bounce early in the year for data on industrial and resource intensive sectors has waned, consumption data continues to be healthy. Retail sales for August 2016 were +10.6% YoY compared to +10.7% for 2015.

In Australia, economic activity, employment conditions and inflation trends are little changed from recent months. Business confidence is currently at long term average levels in Australia. Business conditions have remained patchy for a period of time now with mining related sectors remaining soft but the services and construction (led by residential) sectors supporting economic growth. Australia’s economy continued down the path of gradual expansion in the second quarter to surpass 25 years since the last official recession. Consumer sentiment and unemployment (5.6% currently) has been relatively stable for a period of about six months, supported by recent official interest rate cuts.

Attribution Analysis for the month ended September 2016

Top 5

Bottom 5

Challenger Financial

TPG

Nufarm

Vocus

Ardent Leisure

Macquarie Atlas

Adelaide Brighton

APN News & Media

APN Outdoor

ResMed Inc

Fund Performance

The Concise Mid Cap Strategy returned +8.26% for the quarter, above the benchmark return of +7.55% for the Mid Cap Masters Index. For the month the fund was down -0.67%, below the index return of -0.10%. For the month major contributors to performance included Challenger Ltd (CGF), Nufarm (NUF) and Ardent Leisure (AAD) with TPG Telecom (TPM), Vocus Communications (VOC) and Macquarie Atlas Roads (MQA) the major detractors.

News on portfolio stocks included;

During September JB Hi Fi (JBH) announced the acquisition of 100% of the privately owned The Good Guys for a purchase price of $870 million. The Good Guys is a leading retailer of home appliances and consumer electronics operating out of a 101 store national footprint. The acquisition consolidates JBHs position as the leading retailer of consumer electronics and together with the existing JB Home store network makes JBH the leading retailer of home appliances. The transaction funded via a mix of debt and equity is 12% accretive to JBH with significant synergies to be delivered over the next few years.

In September the ACCC announced that it would not oppose the acquisition by Vocus Communications (VOC) of Nextgen Networks Group Pty Ltd and two development projects; the Australian Singapore Cable and the North West Cable System. This was a positive announcement which improves VOC competitive position in the market place and supports a strategy to challenge the incumbents for increased market share. The August reporting season, however, highlighted a number of issues in an ever changing industry which resulted in a review of our portfolio exposure to telecommunications. The incumbent Telstra (TLS) has responded to industry consolidation and is currently doing a good job with market share on the NBN. The increasing use of video streaming over broadband aka ‘the Netflix effect’ is causing a higher than expected payments to the NBN which results in lower gross margins per subscriber unless the added cost can be passed through to consumers. Given the pick up in competitive intensity we reduced our exposure on revised expectations around market share gains and margins.

Outlook

We are of the view that the outperformance by Mid Cap companies will continue as they offer good medium term value, supported by solid earnings growth and stable Return on Invested Capital compared the ASX 200 and the Small Ords.

Based on data supplied by Credit Suisse and Morgan Stanley & S&P Indices, FY17 Mid Cap Industrial stocks earnings growth is estimated to be 5% higher compared to that of both the ASX 200 Industrial and the Small Ords Industrial companies. Mid Cap’s also offer greater diversity compared to the ASX 200, where Banks, Rio and BHP dominate, while in Small Caps the more volatile resource companies make up close to 20% of the index.

Source: Credit Suisse and Morgan Stanley & S&P Indices

With momentum factors now starting to wane, we are of the view that the recent quarters performance was driven by a return to value based fundamental investing.. Since September the investment team has visited dozens of companies and industry participants throughout Australia and this will continue program deep into December. With the age of free money coming to an end, we are confident that our fundamental bottom up value based investing will come to the fore. We are seeing many value opportunities at present with several oversold companies now offering attractive entry prices with a margin of safety.

*The Mid Cap Masters Index is a price and accumulation price, free float adjusted index calculated daily for Concise on behalf of S&P. The constituent universe of index is the S&P/ASX 200 excluding the S&P/ASX 50. * The CMCF commended on the 16th of April 2008. The since inception figure is annulaised.

This publication is intended to provide general information only and has been prepared by Concise Asset Management (ABN 62 126 975 282) and (AFS Licence No. 320497), the issuer of the Fund, without taking into account any particular person’s objectives, financial situation or needs. Investors should before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. Your investment is subject to investment risk, including possible delays in repayment and loss of income and capital invested. The repayment of capital or income is not guaranteed by Concise Asset Management. Offers of interests in the Fund are contained in a current Product Disclosure Statement (‘PDS’). A copy of the PDS is available from our website: www.conciseam.com.au or contact Client Services on (03) 9642 8968. You should read the PDS and seek professional advice before making any decision about whether to acquire or continue to hold an investment in the Fund.